Brookdale Begins to Feel the Growing Pains Post-Emeritus Merger

The senior housing industry’s first blockbuster merger might be complete, but the integration of Brookdale and Emeritus is creating significant challenges for the nation’s largest provider.

In the first earnings release since its completion of a $2.8 billion merger with Emeritus and a $1.2 billion joint venture with HCP, Brookdale Senior Living (NYSE: BKD) says the company is pleased with its third-quarter results, despite having a lot of moving pieces.

Total revenue for the third quarter was $1.1 billion, an increase of $354.9 million from the third quarter of 2013. In addition, revenue for Brookdale’s consolidated senior housing portfolio was $860.1 million in the third quarter of 2014, an increase of 50.9% from the third quarter of 2013.


However, challenges caused by the mega merger have impacted the company’s operations and will likely continue to do so in the near term.

As part of the integration of Emeritus communities, operational realignment caused disruption in sales activities, lead conversion and occupancy levels within the legacy Brookdale assets.

“During the entirety of this quarter, … our lead base was good and, in fact, it was above historical levels,” said CEO Andy Smith, in the company’s third-quarter earnings call. “However, beginning in August, our conversion rate with respect to those leads dropped, which we believe is primarily attributable to the anticipated disruptions stemming from the integration process. Our expectations have been and continue to be that this integration headwind will persist to some extent for the next few quarters.”


This drop in lead conversions resulted from staff members taking on different responsibilities and handling both the Emeritus and the Brookdale systems, Smith said.

“As part of the operations realignment, 500 field management associates from both of the legacy companies took on new responsibilities and new reporting relationships,” Smith said. “Lots and lots of changed management that’s going on. And, therefore, lots and lots of disruption. … That disruption held us back a little bit in terms of the occupancy growth we would have seen, we believe, had we remained a standalone company.”

While the company didn’t disclose how much its conversion rates dropped, average occupancy for all consolidated communities for the third quarter of 2014 was 88.5%, compared to 88.1% for the second quarter of 2014 and 89% for the third quarter of 2013.

For the 508 legacy Brookdale communities, average occupancy increased 30 basis points from the second quarter of 2014, but decreased 70 basis points compared with the third quarter last year.

For the managed community portfolio, which includes a number of pre-stabilized communities in the initial fill-up phase, average occupancy for the third quarter was 85.8%, compared to 86.8% for the second quarter of 2014 and 85.7% for the third quarter of 2013.

“We have sales folks in our communities [whose] bosses and managers are diverted toward operating new Emeritus communities on [the Emeritus] sales program,” Smith said. “So their managers are distracted, and there’s just a disruption from that as they’re focused on trying to integrate and coordinaet activities in the Emeritus communities. … We think that caused an incremental loss of move-in velocity, which, again, we expect this disruption tunnel to last for a while or to be a tailwind for the next couple of quarters.”

Because of the merger, Brookdale isn’t as tuned in to the M&A landscape, choosing instead to focus on the integration of the two companies.

“Our main mission here is to keep our eye on the ball and make sure we execute our plans with respect to the Emeritus merger,” Smith said. “We’re seeing a deal flow that is … ordinary course. That having been said, it’s going to have to be — with respect to core senior housing assets — a very attractive opportunity for us to pursue it right now, because we don’t want to lose focus on executing our [integration] with Emeritus.”

However, the company is seeing acquisition opportunities in the entry-fee CCRC space and is currently looking at and pursuing those, as that part of the business is least affected by the merger.

Written by Emily Study

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